Payments Processed on the Legacy Core: Not Smart Business

By: John O'Gara

August 16th, 2017

Banks are discovering that the stronghold they once held on payment processing, a thriving revenue-generating machine for their industry, is beginning to slip away. Corporations are finding fintech companies, a community of organizations built upon entrepreneurial business models, disruptive technologies and agile methodologies, can serve their payment needs better. Unlike organizations in any other industry, financial service organizations are enduring exploding information technology costs at a time when major leaps in technology seem to occur daily. This increasing pressure on banks comes at a time when client expectations and behaviors continually shift to the latest modernized convenient options with no expected cost to them, all while regulators pile on new rules. Banking organizations are under considerable stress, and lack the strategic bandwidth to modernize their core payments infrastructure.

Banking’s legacy infrastructure is built on check-dependent data structures that achieve scale by volume. They are managed by outdated operating models and designed on the physical movement of payments. However, payment volume is no longer the basis for achieving economies of scale. Fintechs build smart technologies deployed in nimble fashion to right size applications, architected to streamline information capture and transform simple data into actionable intelligence.

The legacy core platform has seen its share of changes in technology, products and regulations. Generations of bankers have tried to reinvent their legacy core platforms for decades. Yet the systems survived each generation, unrecognizable from their original state and containing endless numbers of integrations pinned to it. Like a massive spider with hundreds of legs, the core has spun a web so complex that even the brightest banking IT professionals have been tangled up by its beautiful complexity. As the payments industry evolved, it began to do so in singular fashion, feature by feature, product by product. What remains is a core littered with integrations that at the time were modern, but today just difficult to support and expensive to manage.

Increases in regional, national and sector-specific regulatory scrutiny and oversight create major obstacles due to the lack of available insight of legacy core technology. Much of the allocated working capital at financial institutions is dedicated to compliance-related initiatives rather than put to use on modernizing or transforming payment-related infrastructures and platforms. The legacy payment silos of the past provide little to no data insight capabilities resulting in constant reactive work efforts to acclimate products to the fluid nature of consumer and corporate payment behaviors.

Many banks are on defense in the payments arena, late to market, missing premium-pricing periods, and struggling to gain market share. The community of companies in the financial technology space has been quick to step in, developing new products in old arenas, introducing easier to manage data exchange protocols and adding robust business intelligence; stripping some of the market from traditional bank participants. The arduous task of replacing or repairing the core payment platform is beyond reach for most banks. Many banks are looking to the fintech community, once thought of as augmented service providers, to become strategic partners charged with overhauling and replacing the legacy core. This is not a retreat from payment processing but rather the recognition that financial technology companies are better positioned to respond quickly to change. Even better for the banking system, fintechs are no longer at odds with banks and today’s fintechs are collaborating at every opportunity with banks.

Bankers can no longer turn their heads and wish the problem away. The core platform is holding the organization back. Replacing or repairing it are no longer viable options in today’s dynamic payments industry. Replacing the core with an elusive payments hub is not only impractical but also nearly impossible, unless the bank has a lot of money to spend and access to a lot of talent. However, all is not lost. The answer is an overhaul of your payments strategy. That strategy should be realistic in that payment processing has become an ancillary service for most banks and the bank would be better positioned focusing on its core competencies. As payment behaviors continue to shift, those that look to strategically source their payment services may fare the best. Demands from regulators, costly compliance operations and stricter evolving information security protocols are only going to continue and ultimately render the payment infrastructure obsolete. Not processing payments on your core platform is smart business.